Withholding Tax in India: A Tax Deduction at source

Withholding tax means the tax deducted at source by the payer of income.

It is also called retention tax.

In India it is called Tax Deducted at source (TDS)

The term “Withholding tax” is used in United States of America (USA) for TDS.

In withholding tax, tax is deducted at source by the payer of income.

In India it is applicable for various source of income like salary, commission, interest, work contract, profession receipts, rent etc.

The main purpose of withholding tax is early generation of revenue to the government.

For example Mr. A received professional services of Rs. 50,000 from a doctor. In turn, Mr. A will pay Rs. 45000 to the Doctor and retain/deduct Rs. 5000 as withholding tax(TDS). Mr. A will deposit the withholding Tax of Rs. 5000 to the Government. The doctor can take credit of this amount while filing his Income Tax return.

So Government received the amount as and when the transaction incurred. Earlier government had to wait for year end for this Rs.5000.

The second benefit of withholding taxes is that the liability to deduct tax is of the payer. He has to ensure that correct amount at correct time is deposited to the Government account. In this way every transaction comes under income tax radar.

One can always take credit of the withholding tax deducted from his income. In the above example, the doctor can take credit of Rs. 5000 while filing his income tax return. Suppose the doctor total income tax liability comes to Rs. 30000 at the time of filing his income tax return. He will only pay Rs. 25000 after deduction Rs. 5000 since the same is already been deducted from his income and remitted to the government by Mr. A.

The doctor, in the above example, can always check online, the withholding tax deducted from his income in Form 26AS.

Read here for details on Form 26AS.

Withholding tax in India

In India, As per Income tax Act, 1956, Chapter XVII deals with Withholding Tax.

Hey readers, welcome to my blog investsaver.com. I am Chartered Accountant by Profession and I love to write on tax & money matters. You may ask your queries through comments related to the topic, I will be happy to answer them.

Withholding Tax rate are based on DTAA betwwen two countries. What if there is no DTAA in place? Is there any clause available in Income Tax Act for such cases? If there is no clause for such condition what we should do? Should we deduct and pay to Government while this amount will not be claimed by foreign company as there is no DTAA? Or we should not deduct WHT when we see there is no DTAA established.